<b>Revenue growth steady, margins under pressure</b>

Though the revenue growth and FY11 guidance met expectations, wage hikes, currency movements and higher tax expenses hurt bottomline

Infosys reported a rupee revenue growth of 13% y-o-y to Rs 6,198 crore in Q1FY11 and 4% higher than Q4FY10 numbers. Revenues were about 4% ahead of the upper level of the guidance given in the previous quarter with INR-USD rate averaging Rs 45.58 in the quarter against an assumption of Rs 44.5 for the guidance.

Constant currency revenues increased to $1358 million, rising 21% y-o-y and nearly 5% sequentially, about 2% ahead of upper level of guidance.

Net profit slumped 2.4% y-o-y and 7% sequentially below Q4FY10 numbers to Rs 1,488 crore, impacted by higher tax expenses (up 30% y-o-y and 15% q-o-q above 4QFY10). Selling and marketing expenses were up 30% y-o-y, reflecting the wage hikes of about 22-235 undertaken in the last 6-8 months. Operating margins in rupee terms dipped to 28.3%, shrinking 178 bps compared to Q4FY10 numbers and down 173 bps y-o-y.

Business momentum was healthy with total billable person months billed increasing almost 7% over the previous quarter, with IT services showing a 7.6% increase sequentially. Adjusted for currency, onsite pricing increased by 2.2% and offshore pricing dropped by 3.2% QoQ, as per an IIFL report. However, analyst opinions were mixed regarding margin outlook and whether they have touched trough levels. Management has indicated that  the pricing environment is stabilizing and sees currency movements as the main risk in the current environment. It expects that margin turnaround will come once the investments in hiring effected over the last 6-8 months gets translated into growth.

BFSI (banking, financial services and insurance) revenues were boosted by higher insurance revenues, with contribution to total revenues expanding to 36.1%, up 130 bps over the previous quarter. Contributions from other verticals were steady at earlier levels except telecom (which saw marginally lower revenues). In terms of geography, revenues from Europe were marginally lower as a proportion of total revenues, even as revenues from the US tracked up to 67.3% compared to 66% last quarter. The company added 38 clients this quarter and with 7 new client acquisitions in the over 50 million dollar space. The attrition rate increased to 15.8% in the recently concluded quarter as compared to 13.45% in the previous quarter.

Infosys has increased its FY11 revenue guidance by 6.5% over the guidance given in April 2010, to a range between Rs 26441 crore to Rs 26885 crore, at a USD-INR conversion rate of Rs 46.45 compared to Rs 44.5 estimated in April. EPS is expected to be in a range between Rs 112 to Rs 117, a growth of 3% to 7.1% y-o-y excluding one-offs.

“The guidance has been strong and is per our expectations. This confirms our view that the volume growth is happening and off-shoring will increase as we go along,” said Vaibhav Agrawal, VP – Research, Angel Broking. Click here to read the complete interview

The stock is down nearly 3% in trading post results announcement after running up 5.55 in the last week and nearly 105 in the last month in anticipation of stronger earnings outlook. It is currently trading at Rs 2812.5 levels, at a P/E valuation of 23x consensus one year forward EPS estimates.